Question 1

The goodwill of one business is never of a like-kind to the goodwill of a different business.

Accepted Answer

Goodwill is unique to each individual business and is based on factors such as reputation, customer base, and brand recognition. Therefore, the goodwill of one business will never be exactly the same as the goodwill of another business.

Question 2

Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.

Accepted Answer

In a nontaxable exchange, the basis of the property received is generally the same as the basis of the property exchanged, adjusted for any additional money or property included in the deal, not the cost basis of the new property.

Question 3

A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.

Accepted Answer

False

Question 4

Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

Accepted Answer

Nontaxable exchanges, such as like-kind exchanges, result in a temporary difference between the book value and tax basis of the assets involved. This difference will eventually be resolved when the assets are sold or otherwise disposed of, but in the short-term it can lead to differences between book income and taxable income.

Question 5

A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.

Accepted Answer

A taxpayer cannot recognize a loss on the exchange of like-kind property under Section 1031 of the Internal Revenue Code. The tax basis of the exchanged property is transferred to the replacement property, and any gain or loss is deferred until a taxable disposition of the replacement property occurs.

Question 6

Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds were issued by the same corporation, they are like-kind properties, and the exchange is nontaxable.

Accepted Answer

The exchange of stock for corporate bonds does not qualify as a like-kind exchange under U.S. tax law, as stocks and bonds are considered different types of property with different rights and characteristics. Like-kind exchanges typically apply to real estate transactions.

Question 7

Reiter Inc. exchanged an old forklift for new office furniture. This exchange qualifies as a nontaxable like-kind exchange.

Accepted Answer

The exchange of a forklift for office furniture does not qualify as a like-kind exchange because the assets are not of the same nature or character. Therefore, it is a taxable exchange.

Question 8

A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

Accepted Answer

This is the correct rule for recognizing gain in a nontaxable exchange involving boot.

Question 9

Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Tarletto's book basis in the new asset is $229,000 greater than its tax basis.

Accepted Answer

If the exchange is nontaxable, the book basis of the new asset is equal to the book basis of the old asset surrendered, plus any cash paid, and the tax basis of the new asset is equal to the tax basis of the old asset surrendered, reduced by any cash paid, but increased by any gain recognized. Therefore, if there is a nontaxable exchange with a $229,000 gain recognized, the book basis in the new asset will be $229,000 greater than the tax basis.

Question 10

Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a $21,000 favorable permanent book/tax difference.

Accepted Answer

The $21,000 gain is a temporary difference, not a permanent one, because it will affect taxable income in the future when the new asset is depreciated or disposed of, not creating a permanent difference between book and tax income.

Question 11

Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an inventory item, the exchange is nontaxable.

Accepted Answer

The exchange of inventory items, even for another inventory item, is considered a taxable event for tax purposes because inventory is held primarily for sale to customers in the ordinary course of business, and gains or losses from such exchanges are recognized.

Question 12

Yelano Inc. exchanged an old forklift used in its business for a new forklift. This exchange qualifies as a nontaxable like-kind exchange.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 changed the rules for like-kind exchanges. After December 31, 2017, like-kind exchanges are limited to real property that is not held primarily for sale. Therefore, an exchange of personal property, such as forklifts, no longer qualifies as a nontaxable like-kind exchange.

Question 13

Gain realized on a property exchange that is not recognized is deferred.

Accepted Answer

According to the rules of Section 1031 of the Internal Revenue Code, when a property exchange meets certain requirements and is considered a like-kind exchange, the gain realized on the exchange is deferred and not recognized immediately.

Question 14

All types of business and investment real properties are like-kind.

Accepted Answer

According to Section 1031 of the IRS tax code, all types of business and investment real properties are considered like-kind, regardless of their specific use, location, or quality. This means that a commercial property can be exchanged for a residential property, a rental property for raw land, or any other combination of real estate assets, as long as they are held for investment or business purposes. However, personal residences and vacation homes do not qualify for like-kind exchanges under this provision.

Question 15

When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties are of equal value.

Accepted Answer

This is known as the "arm's length transaction" principle and is based on the assumption that each party is acting in their own best interest and would only agree to an exchange if they believed the properties were of equal value.

Question 16

Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.

Accepted Answer

Exchanging equity interests in two partnerships results in a taxable transaction.

Question 17

Mr. Lexon owns investment property with a $719,000 basis. If the property is worth only $500,000, Mr. Lexon would prefer a taxable disposition of the property over a like-kind exchange.

Accepted Answer

A taxable disposition would allow Mr. Lexon to recognize a loss of $219,000, which could be used to offset other capital gains or reduce his taxable income. A like-kind exchange would defer the recognition of the loss until the replacement property is sold.

Question 18

When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties have the same adjusted book basis.

Accepted Answer

The economic presumption in an exchange of noncash properties between unrelated parties is that the properties have the same fair market value, not the same adjusted book basis. The adjusted book basis is an accounting measure that may not reflect current market conditions or value.

Question 19

A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.

Accepted Answer

This is correct according to the tax code. When a taxpayer receives boot in a nontaxable exchange, the value of the boot is added to the basis of the property received.

Question 20

The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.

Accepted Answer

The substituted basis rule results in temporary nonrecognition of gains and losses, as the basis of the new asset is adjusted to reflect the deferred gain or loss, which will be recognized upon the future sale or disposition of the asset.

Quiz 9: Nontaxable Exchanges